aaMODULE 1 - AC101 FAR the effects of the event on the “accounts.

”
This process is called “posting.”
3. Communicating – At the end of each
Chapter 1 - Introduction to Accounting accounting period, the accountant
summarizes the information processed in
the accounting system in order to produce
Definition of Accounting
meaningful reports. Accounting
Accounting is a process of identifying, recording,
information is communicated to
and communicating economic information that is
interested users through accounting
useful in making economic decisions.
reports, the most common form of which
As per ACCOUNTING STANDARDS COUNCIL
is the financial statements.
(ASC)
Nature of accounting
Accounting is a service activity. Its function is to
Accounting is a process with the basic purpose of
provide quantitative information primarily
providing information about economic activities
financial in nature about economic entities that is
intended to be useful in making economic
intended to be useful in making economic
decisions.
decisions.
Types of information provided by accounting
As per ACCOUNTING INSTITUTE OF CERTIFIED
1. Quantitative information
PUBLIC ACCOUNTANT(PICPA)
2. Qualitative information
Accounting is the art of recording, classifying,
3. Financial information
summarizing in a significant manner and in
Functions of Accounting
terms of money, transactions and events, which
1. Recording is a role of accounting involved with
are in part at least of a financial character and
the writing of business transactions on the book
interpreting the result thereof.
of the company
As per AMERICAN ACCOUNTING
2. Classifying is a function of accounting involved
ASSOCIATION(AAA)
with the sorting or grouping of similar items
Accounting is the process of identifying,
under one name or caption.
measuring and communicating economic
3. Summarizing is a function of accounting
information to permit informed judgment and
involved with the preparation of financial reports
decision by users of the information.
(Financial Statements).
Essential elements of the definition of
4. Interpreting is a function of accounting
accounting
involved with the analysis of financial statements.
1. Identifying - The accountant analyzes each
Functions of Accounting in Business
business transaction and identifies
1. To provide external users with
whether the transaction is an “accountable
information that is useful in making investment
event” or “non-accountable event.”
and credit decisions; and
2. Recording – The accountant recognizes
2. To provide internal users with
the “accountable events” he has identified.
information that is useful in managing the
This process is called “journalizing.” After
business.
journalizing, the accountant then classifies
Brief history of accounting 4. Cooperative
• Accounting can be traced as far back as more Types of business according to activities
than 10,000 years ago. 1. Service business
• Archaeologists have found clay tokens as old as 2. Merchandising (Trading)
8500 B.C. in Mesopotamia which were usually 3. Manufacturing
cones, disks, spheres and pellets that were used in Bookkeeping methods
the Middle West in keeping records. After some 1. Single entry bookkeeping method is a method
time, the tokens were replaced by wet clay of bookkeeping which records only one effect of a
tablets. transaction .
• Double entry records first came out during 1340 2. Double entry bookkeeping method is a
A.D. in Genoa. bookkeeping method which recognizes the two
• In 1494, the first systematic record keeping effects in a transaction.
dealing with the “double entry recording system”
was formulated by Fra Luca Pacioli, a Franciscan Chapter 2 - Accounting Concepts and
monk and mathematician. The “double entry
Principles
recording system” was included in Pacioli’s book
titled “Summa di Arithmetica Geometria
Basic Accounting Concepts
Proportioni and Proportionista,” published on
• Separate entity concept – The business is viewed
November 10, 1494 in Venice.
as a separate entity, distinct from its owner(s).
• Fra Luca Pacioli is considered as the father of
Only the transactions of the business are recorded
modern accounting.
in the books of accounts. The personal
Common Branches of Accounting
transactions of the business owner(s) are not
1. Financial Accounting
recorded.
2. Management Accounting
• Historical cost concept (Cost principle) – assets
3. Government Accounting
are initially recorded at their acquisition cost.
4. Auditing
• Going concern assumption – The business is
5. Tax Accounting
assumed to continue to exist for an indefinite
6. Cost Accounting
period of time.
7. Accounting Education
• Matching – Some costs are initially recognized as
8. Accounting Research
assets and charged as expenses only when the
Users of Accounting Information
related revenue is recognized
1. Internal users – those who are directly involved
• Accrual Basis of accounting – income is
in managing the business.
recorded in the period when it is earned rather
2. External users – those who are not directly
than when it is collected, while expense is
involved in managing the business.
recorded in the period when it is incurred rather
Forms of business organizations
than when it is paid.
1. Sole proprietorship
• Prudence – The observance of some degree of
2. Partnership
caution when exercising judgments under
3. Corporation
conditions of uncertainty. Such that, if there is a
choice between a potentially unfavorable Qualitative Characteristics
outcome and a potentially favorable outcome, the I. Fundamental Qualitative Characteristics
unfavorable one is chosen. This is necessary so i. Relevance (Predictive Value,
that assets or income are not overstated and Confirmatory Value, Materiality)
liabilities or expenses are not understated. ii. Faithful Representation (Completeness,
• Reporting Period – The life of the business is Neutrality, Free from error)
divided into a series of reporting periods. II. Enhancing Qualitative Characteristics
• Stable monetary unit – Assets, liabilities, equity, i. Comparability
income and expenses are stated in terms of a ii. Verifiability
common unit of measure, which is the peso in the iii. Timeliness
Philippines. Moreover, the purchasing power of iv. Understandability
the peso is regarded as stable. Therefore, changes Fundamental vs. Enhancing
in the purchasing power of the peso due to • The fundamental qualitative characteristics are
inflation are ignored. the characteristics that make information useful
• Materiality concept – An item is considered to users.
material if its omission or misstatement could • The enhancing qualitative characteristics are the
influence economic decisions. Materiality is a characteristics that enhance the usefulness of
matter of professional judgment and is based on information.
the size and nature of an item being judged. Relevance
• Cost-benefit – The costs of processing and • Information is relevant if it can affect the
communicating information should not exceed decisions of users.
the benefits to be derived from the information’s • Relevant information has the following:
use. a. Predictive value – the information can
• Full disclosure principle – Information be used in making predictions
communicated to users reflects a balance b. Confirmatory value – the information
between detail and conciseness, keeping in mind can be used in confirming past predictions
the cost-benefit principle. Materiality – is an ‘entity-specific’ aspect of
• Consistency concept – Like transactions are relevance.
accounted for in like manner from period to Faithful representation
period. • Faithful representation means the information
Philippine Financial Reporting Standards provides a true, correct and complete depiction of
(PFRSs) what it purports to represent.
The PFRSs are Standards and Interpretations • Faithfully represented information has the
adopted by the FRSC. They consist of the following:
following: a. Completeness – all information
1. Philippine Financial Reporting Standards necessary for users to understand the
(PFRSs); phenomenon being depicted is provided.
2. Philippine Accounting Standards (PASs); and b. Neutrality – information is selected or
3. Interpretations presented without bias.
 c. Free from error – there are no errors in business.
the description and in the process by which the Cash
information is selected and applied. Short term investments like Trading
Enhancing Qualitative Characteristics securities
1. Comparability - an accounting principle that Receivables - includes accounts receivable,
enables the users to identify and understand notes receivable, installment receivable, other
similarities and dissimilarities among items. receivables
2. Consistency - is an accounting principle which Inventories - includes merchandise
states that accounting methods used should be inventory, raw materials inventory, work in
the same from year to year. process inventory, finished goods inventory and
3. Objectivity - Accounting records should be manufacturing supplies
based on reliable documents. Prepaid expenses - includes prepaid rent,
4. Historical cost is an accounting principle which prepaid insurance, prepaid advertising and
states that property and equipment should be Supplies
recorded at acquisition cost. Liabilities - are economic obligations, referring to
5. Materiality - dictates that strict adherence to debt of the business.
GAAP is not required when the items are not Accounts payable
significant enough to affect the evaluation, Notes payable
decision and fairness of the financial statements. Unearned Revenues
6. Faithful representation means that the actual Accrued expenses like:
effects of the transactions shall be properly Salaries payable
accounted for and reported in the financial Interest payable
statements. Capital - interest of the owner in the business. It is
7. Neutrality - the financial information should not composed of:
favor one party to the detriment of another party. Original investment
8. Understandability - requires that financial Additional investment
information must be comprehensible or Net income:
intelligible if it is to be most useful. Revenues
9. Timeliness - financial information must be Expenses
available or communicated early enough when a Owner's Withdrawal/Drawing/Personal
decision is to be made. INCOME STATEMENT Is a financial statement
Financial Statements which shows the result of operation of a business
STATEMENTS OF FINANCIAL POSITION for a given period of time.
(BALANCE SHEET) Is a financial statement which Composition:
shows the financial position of a business as of a Revenue:
given period of time. Sales
Composition: Service Income
Assets - are economic resources, referring to Interest Income
property or rights on property owned by the Rent Income
 Gain on sale distributions to the business owner.
Expenses: • The difference between income and expenses
Salaries expense represents profit or loss.
Insurance expense
Rent expense Chapter 4 - Types of Major Accounts
Advertising expense
Supplies expense
The Account
Utilities expense
• An account is the basic storage of information in
STATEMENT OF CASH FLOWS Is a financial
accounting. It is a record of the increases and
statement which shows the sources and uses of
decreases in a specific item of asset, liability,
cash
equity, income or expense.
Composition:
The Five Major Accounts
Operating activities
1. ASSETS – are the resources you control that
Investing activities
have resulted from past events and can provide
Financing activities
you with economic benefits.
2. LIABILITIES – are your present obligations that
Chapter 3 - The Accounting Equation have resulted from past events and can require
you to give up economic resources when settling
them.
The Accounting Equation
3. EQUITY – is assets minus liabilities.
Assets = Liabilities + Equity
4. INCOME – are increases in economic benefits
• ASSETS – are the economic resources you
during the period in the form of inflows or
control that have resulted from past events and
enhancements of assets or decreases of liabilities
can provide you with economic benefits.
that result in increases in equity, other than those
• LIABILITIES – are your present obligations that
relating to investments by the business owners.
have resulted from past events and can require
5. EXPENSES – are decreases in economic
you to give up economic resources when settling
benefits during the period in the form of outflows
them.
or depletions of assets or increases of liabilities
• EQUITY – is assets minus liabilities.
that result in decreases in equity, other than those
The Expanded Accounting Equation
relating to distributions to the business owners.
Assets = Liabilities + Equity + Income - Expenses
Terminologies
• INCOME – is increases in economic benefits
Bookkeeping - is the chronological recording of
during the period in the form of increases in
business transactions and events.
assets, or decreases in liabilities, that result in
Value is anything susceptible to pecuniary
increases in equity, excluding those relating to
estimation.
investments by the business owner.
Transaction is the exchange of goods or services
• EXPENSES – are decreases in economic benefits
for a certain sum of money.
during the period in the form of decreases in
Debit is the left side of an account.
assets, or increases in liabilities, that result in
Credit is the right side of an account.
decreases in equity, excluding those relating to
Journalizing is a process of recording transactions
on the company's book of accounts.
Journal entry is the record of business
transactions and events in the book.
Journal is the book where business transactions
are recorded for the first time.. It is also known as
the book of Original entry
Chart of accounts is a classified list of account
titles.
Ledger is a group of accounts. A ledger is also
known as the book of Final Entry.
Posting is the process of transferring the same
information from the journal to the ledger.
T Account is an accounting device used to
summarize addition and subtraction by position.
Trial Balance is a proof of the equality of debits
and credits
Rules of Debit and Credit
Assets - Dr increase, Cr decrease. Balance on Dr.
Liabilities - Dr decrease, Cr increase. Balance on
Cr
Capital - Dr decrease, Cr increase. Balance on Cr
Contra-Asset - Dr decrease, Cr increase. Balance
on Cr
Revenues - Dr decrease, Cr increase. Balance on
Cr
Expenses - Dr increase, Cr decrease. Balance on
Dr.
Owner’s Drawing - Dr increase, Cr decrease.
Balance on Dr.